How to Determine Shares of Stock for a New Business

by James Collins, studioD

There are two main way for investors to invest in your business: through stocks or bonds. Bonds represent a debt to the company, while stocks represent a form of ownership to the investor and do not need to be paid back to the investor. As such, many companies like to issue stock to raise capital. But if you've never issued stock before, you must first incorporate your company and determine how many shares of stock will be created for distribution.

Determine the goal of incorporation. Some companies issue shares to give to the owners or founders of the business. Others issue shares because it is necessary for incorporation. Others issue shares because they are just starting up and need capital. In the first two scenarios, it does not matter how many shares you authorize, but it does matter if you're a newly formed start-up company in need of capital.

Determine how many shares you want to issue to the founders. Assume you want to issue each founder 1 million shares of stock.

Determine how many shares you want to reserve for stock options paid out to management and employees for compensation. Assume you want to reserve 1 million shares for stock options.

Determine how much stock you want to issue to investors. Assume you plan on issuing at least 5 million shares to investors over the life of the company.

Sum up the number of shares you want to issue, assuming there are 10 founders in the start-up. At 1 million shares per founder, 1 million for stock options and 5 million for investors, you will need to authorize at least 16 million shares.

About the Author

James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.

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